Daily Newsletter, Wednesday, 3/6/2019

Table of Contents

Market Wrap

No News Is Not Good News

by Thomas Hughes

No news on trade is not a good thing for markets high on hope. Hope can only take the rally so high, with so much expectation baked into the cake it's not hard to see a sell-the-news situation developing. Add in the fact earnings season is at an end, the outlook for 2018 is still deteriorating, and the first quarter is expected to post negative earnings growth and the odds of a market correction grow substantially.

Today's action was bearish from the get-go. The broad market moved steadily if sluggishly lower throughout the day until hitting a low just before the release of the Beige Book Report. The report was about as expected and did little to alter today's mood or outlook for 2019. The most important aspect of the report was a downgrade to growth. Only 10 of the 12 Federal Reserve Districts reported growth and that was slight to modest, down from modest to moderate. The other two districts reported flat growth.

Market Statistics

This month's Beige Book includes a large chunk of the Government Shutdown and that is mentioned in the report. Only have of the districts report an impact from the shutdown which suggests the slowdown in activity is largely related to it. Spending was mixed across regions with most reporting some weakness in retail and auto sales. Real estate markets are still viewed as healthy if sluggish, construction is seen rising while sales have weakened. Manufacturing strengthened, employment is still strong, and wages are improving at a modest to moderate rate. The market was able to stabilize following the report but a significant rebound did not materialize.

Economic Calendar

The Economy

Mortgage applications fell this week after a slight increase in mortgage rates over the past week. Applications fell -2.5% from the previous week and are down -2.0% from last year at this same time which reveals market weakness persists despite strong application figures over the past month. Entry-level buyers are the least active because they are still getting prices out of the market. Higher-end and upgrade buyers looking for higher cost and larger houses are the bulk of activity.

The trade deficit surged 18.8% in December. The increase is driven by an increase in imports and really no surprise. Businesses were actively buying products from China in preparation for expected tariffs that were never imposed. The surge brings the total deficit to +12.% in 2018 despite Trump's best efforts to bring the figure closer to zero.

The ADP Employment Report was a little light this morning but still good and still consistent with overall labor market health. The total number of new jobs came in at 183000, with revisions to December and January the figure is a tepid 156,000. Details within the report help mitigate the weakness, jobs were created across a broad spectrum of business size and type. Medium and large-sized business led but small businesses were able to add jobs too.

Job gains were strongest in the services sector but manufacturing and construction trades also posted strong increases. The ADP isn't a great indicator for the NFP but it at least suggests stability in the labor market. The consensus NFP is near 180,000 but that's not what will be important. The most important figures in the NFP will be the Labor Force Participation Rate, the size of the labor force, unemployment, and wages. Wages are expected to tick up 0.3% MOM and 3.3% YOY as tightening labor conditions accelerate wage inflation.

The Atlanta Fed has upped their GDP forecast for the 1st quarter but only barely. The GDPNow tool shows a 0.5% growth rate, about 1.5% below the analyst's consensus.

The Dollar Index

The Dollar Index held relatively steady in today's action after attempting to move both up and down. The index is caught in the crosswinds of data and Fed speakers that can't quite seem to make up their minds. The U.S. economy is doing well but not as well as it was, a slowdown is coming but not as bad as first feared, the FOMC is patient to wait on data but thinks more rate hikes are needed; enough to make anyone's brain boil trying to gauge market direction.
Today's action shows there is some resistance to rising prices in the range of $97.00, a little lower than I anticipated, but this may just be a stopping point on the march higher. The indicators are still bullish which suggests a move up to the top of the near-term trading range, near $97.50, and that may be broken if the rest of this week's data is good, or we get a positive trade headline, or overseas data is weak.

The Gold Index

Gold prices edged lower to form a small spinning top candle just above the recent low. This is the third candle to trade sideways at this level which raises the possibility of bear-market consolidation and continuation. The indicators are strongly bearish and momentum is on the rise so lower prices are very likely. It is possible prices will bounce from this level and move higher but I wouldn't expect too much out of the move unless an external catalyst emerges. The current MACD is a major extreme and that means we can expect the current lows, near $1280, to be retested or broken some time in the future if prices don't move lower now. A move to new lows would confirm the new downtrend and may lead spot-price to $1,260 and $1,240 in the near to short-term.

The Gold Miners ETF GDX shed -2.0% in a move confirming resistance at the short-term moving average. The ETF appears to be consolidating for a deeper move lower with only support at today's low to hold it up. Support is at $21.50 and may hold but the indicators are bearish so I would expect it to be tested strongly at least. A move below $21.50 would be bearish but possibly only in the near-term, the next target for support is the long-term moving average near $21.

The Oil Index

Oil prices slipped in today's trade on inventory data but the dip was short-lived. The EIA says crude stockpiles surged 7.1 million barrels over the past week, 6 million more than expected, but the increase is partially offset by bigger than expected draws in gas and distillates. Today's move trimmed about -1.0% off the price intraday but the losses didn't hold. Support stepped in just above the $55 level and recovered most of today's decline. WTI is still consolidating above an important support level and appears to be setting up a move higher.

The Oil Index fell about -1.50% in today's session. The index formed a small red candle moving down to support at the short-term moving average. The index is still in consolidation, waiting on oil prices to decide what they are going to do, and appear to be well supported at this level. The indicators are weak so we may see support at the moving average tested, a fall below that level may be bearish, more so if accompanied by falling oil prices. Longer-term I expect OPEC's tightening efforts will prevail and lift both oil prices and the oil sector.

In The News, Story Stocks and Earnings

Shares of GE fell another -8.0% in the wake of CEO Culp's astonishing cash-flow revelation. Today's news was focused on the analyst's reaction and it's not good. One analyst says GE is a broken business whose backlog fueled business is running out of steam. Morgan Stanley's Steven Tusa says his $6 price target looks generous in light of the revelation, he now values the power business at a buck and the capital services at a zero. Other analysts say a major restructuring announcement is on the way but I don't think that is news to anybody. Today's action took shares below the 30-day moving average where resistance is confirmed. The baby-bull market sparked by turnaround efforts is already dead. My target is near $6.50 and the December low.

Facebook made headlines twice today, the first time when CEO Mark Zuckerburg came out with his plan for a safer internet. The plan is a joke coming from him, a man who's built his empire exploiting the personal data of millions of users worldwide, and involves refocusing Facebook around privacy. Regardless of the plan's merits, it was a smart move for Zuck to present a plan because if he can control the narrative he can keep himself in business. The second time the company made news today was when a number of advertisers came out saying they had left Facebook because of its 'despicable business model'. Shares of the stock set a new high in today's session and may be heading higher.

The VIX advanced nearly 7.0% to form a medium-sized green candle. The fear index is slowing creeping higher and it looks like it may rise further while traders wait on trade news. Today's resistance is the short-term moving average, prices may halt here but there is no guarantee that will happen. The indicators a bullish and gaining strength so I would expect to see fear spike sometime in the near future. A move above the short-term moving average would be bullish for the VIX, a move above the long-term moving average would be very bullish for fear.

The Indices

The indices have crested a peak and begun to pull back. The question now is how deep will the correction be?

Today's action was led by the NASDAQ Composite which shed nearly a full percent. The index created a medium sized candle that moved down to support at the bottom of the near-term consolidation range. Support is at 7,500 but the indicators are bearish so it may be broken, it will be tested. Both MACD and stochastic have formed bearish crossovers that suggest a move to major support is possible. My first target is near 7,425 and the short-term moving average which is sitting about 20% above the December low. A move below 7,425 could spell bad news for the index.

The S&P 500 posted the second largest decline today at -0.65%. The broad market index created a medium-sized red candle extending the fall from recent resistance. Resistance is at a major uptrend line, consistent with a 20% advance from the December low, and possibly quite strong in light of declining earnings expectations and negative outlook for the first quarter. A move below today's low would be bearish for the index and likely take it lower. My next targets for support are the short and long-term moving averages near 2,740 and 2,710.

The Dow Jones Industrial Average closed with a loss of -0.51% and formed a smallish red candle. The candle is just above potentially strong support targets at a long-term uptrend line, the short and long-term EMAs so a deeper move may not be coming. The indicators are however very bearish showing crossovers consistent with falling prices. A fall from this level may bounce from support near 25,500, a fall below there will likely go to 25,000.

The Dow Jones Transportation Average also fell -0.51% and formed a small red candle. The transports are leading the market lower and today broke through support targets at the pair of moving averages. The indicators are bearish and pointing lower so a deeper fall is expected. The caveat is that stochastic is also entering oversold territory so we may see buyers begin to step in soon. If support does not form near today's close, near the 10,250 level, I think we'll see this index move down to 10,000 if not lower.

The indices are rolling over into bearish signals that may lead them down 3% to 5% in the not-too-distant future. This doesn't mean the long-term secular bull market is over, just that profit-taking and sector rotation will dominate the market until there is a reason to start buying again. The trade deal may be that reason but I don't think so, this first stage of reconciliation has already been discounted.

Earnings are what really drive the market. While estimates for 2019 earnings growth are falling and the outlook for the first quarter is negative I don't see much reason to be a buyer, not fundamentally, in the nearer term. Longer-term I see a rally forming and it may start during the 1st quarter earnings cycle when the EPS slowdown is expected to bottom. I remain firmly bullish for the long-term because earnings growth is expected return later this year, and to accelerate into next year. I am cautiously bearish for the near-term.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Fool Not Rushing In

by Jim Brown

They say fools rush in where angels fear to tread. After the 2% drop on the Russell 2000 today, this fool is not rushing to add to long positions. The Russell is the market leader and support was broken. The S&P futures are down -5 and slowly bleeding lower. Bullish sentiment appears to have broken and investors are now afraid of the China trade deal rather than excited about it. No new plays tonight.

New positions are only added on Wednesday and Saturday except in special circumstances. NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays

NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays

In Play Updates and Reviews

Key Reversal

by Jim Brown

The Russell 2000 imploded with a 2% decline to lead the big caps lower. Wednesday was a bad day for market sentiment. The Russell 2000 is the sentiment indicator for fund managers, and it is flashing a huge warning sign. The sharp sell off in small caps suggests managers have decided to cash in their chips on the China trade agreement bet. They have been wildly successful since the end of December and it is time for caution.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green.
We need to always be prepared for a profit exit at resistance.

Current Position Changes

IWM - Russell 2000 ETF
The long position was stopped at $154.85.

Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.

We reentered the position on Tuesday and the result was the same. The Russell imploded today with a 2% decline to stop us out again.

Original Trade Description: March 2nd

The investment seeks to track the investment results of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index. Company description from FinViz.com.

This is a short-term trading position based on expectations for a Chinese trade deal to be completed in March. I expect the markets to struggle higher into that president's meeting in Florida and then roll over.

The 30-min chart on the Russell shows a potential breakout ahead over the 1,600 level. The IWM has already closed over the 200-day, which has been holding the index back. It is entirely possible the Russell could run to 1,700 over the next three weeks if the China headlines continue to be positive.

However, this is a high risk position. The slightest headline about a glitch in the negotiations could tank the market. I do believe the prior highs are going to act like a tractor beam for the indexes as long as we do not suffer a headline disaster.

The end of February weakness was right on schedule and now we are poised for a directional move. Given 10-weeks of gains, that could be in either direction.